Australia’s low-skill visa system is wrecking productivity

Yesterday’s annual productivity report from the Australian Bureau of Statistics (ABS) revealed that multifactor productivity (MFP) – the key driver of Australian – fell by 0.4% in 2018-19, with labour productivity also registering its first ever fall of 0.2%, or 0.8% when adjusted for the quality of work:

The result led to the usual head-scratching from the mainstream media, with the AFR reporting the following:

Labour productivity in Australia has fallen for the first time in 25 years, raising serious concerns about what economic reforms are in place to improve the productivity of workers…

Few reasons were provided by the ABS for this unusually poor reading except that it reflected a contribution from changes to labour composition, due to educational attainment and work experience…

The mainstream media and economists would do well to read last week’s prescient research from the Australian Population Research Institute (APRI), which argued that surging low-skilled migration into Australia has created a low-productivity economy that is undermining wage growth:

The Coalition and its advisors (including Treasury and the RBA) know that while this population policy prevails it will put a floor under Australia’s aggregate economic growth performance – in the process helping to sustain the narrative of Australia’s 28 years of unbroken economic growth…

To this end the Coalition has put in place migration policy settings which ensure NOM remains around the present level of 250,000 a year over the next two years…

The recent reduction in the permanent program from 190,000 to 160,000 a year is window dressing. This cut is being more than made up by measures that allow temporary migration to continue to expand. The stock of migrants holding temporary entry visas in Australia has expanded from 1.8 million in June 2015 to 2.2 million in June 2019. Such is the effect of this expansion that Australia’s current migration program is best described as a low-skill, rather than a high-skill program…

While this labour supply abundance persists employer do not have to raise wage rates nor do they need to invest in labour saving equipment. If more output is required they can simply run existing equipment harder and/or take on more workers at existing wage rates.

From this perspective the ‘jobs and growth’ strategy is part of the problem rather than the solution.

The Australian economy is at a stalemate. With NOM a crucial part of the ‘jobs and growth’ strategy neither the Coalition nor its advisors can contemplate any reduction in immigration in order to make the labour market more competitive.

The likelihood is that the economy will limp along, deriving most of its growth from extra hours worked and propped up by additional government expenditure, more infrastructure investment and a boost to the housing industry via low interest rates.

All of these measure will deliver low gains in labour productivity. They mean that Australia will continue to move down a low productivity pathway…

The conclusion is that while the ‘jobs and growth’ strategy prevails Australia will be stuck on a low productivity pathway, dependent for its economic growth on continued increases in population.

The strategy is foolish. All it achieves is the addition of an ever larger, relatively unproductive, domestic burden on to Australia’s narrow commodity-based international economy.

The only minor disagreement I have with the APRI authors is the notion that the driver of Australia’s “low-skill” visa system is temporary migration. Because Australia’s permanent migrant intake is also low-skilled and low-paid, as evidenced by the appallingly low median income of $49,438 earned by permanent migrants in 2016-17 (see yesterday’s post).

Regardless, stemming the flood of migrant workers into the economy would be positive for both productivity and wages. Why? First, because the least productive businesses would lose people, shrink and go bust, transferring workers, land and capital to more productive businesses, thereby raising average productivity across the economy. Second, all businesses, observing higher wages, would invest more in labour saving technologies, training and restructuring to raise productivity.

This is how the labour “market” is supposed to work. However, allowing the mass importation of foreign workers circumvents the ordinary functioning of the labour market by enabling employers to pluck cheap foreign workers in lieu of raising wages. This is deleterious for both Australian workers and the broader economy.

Let’s also remember the other ‘costs’ of mass immigration on productivity.

Growing the population without commensurately increasing the stock of household, business and public capital to support the bigger population necessarily ‘dilutes’ the capital base, leaving less capital per person and lowering productivity. We have witnessed this first hand with the costs of congestion soaring across Australia’s big cities.

Moreover, the cost of retro-fitting Australia’s major cities with infrastructure to cope with larger populations is necessarily very expensive – think tunnelling and land acquisitions – with costs borne largely by the incumbent population.

Given Australia’s low savings rate, the large levels of housing and infrastructure investment required to keep pace with population growth also puts upward pressure on real interest rates. That, in turn, has kept the Australian dollar elevated for years making it harder to export from Australia and resulting in manufacturing closures.

Finally, high immigration has unambiguously helped to lift housing costs. This has made it more difficult for younger households to invest in businesses, limiting entrepreneurship. High housing costs also creates barriers to labour mobility and social mobility, both of which matter for achieving Australia’s productive potential.

Currently, there is no economic plan other than to flood Australia’s major cities with tens-of-thousands of extra people each year to stoke overall economic growth (but not growth per person), to support big business (e.g. the property industry), and to prevent Australia from going into recession (despite growth and income per person stagnating).

Meanwhile, productivity and individual living standards are being eroded through labour market inefficiencies, rising congestion costs, declining housing affordability, paying more for infrastructure (e.g. toll roads and water desalination), environmental degradation, and overall reduced amenity.

Mass immigration is hindering, not helping, Australia’s productivity.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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